May 18

S&P500 daily @ 12:45 EDT

Markets opened slightly higher as everyone was eagerly anticipating the public trading of FB scheduled for 11am.  But the early strength was fairly constrained given all the other things on the market’s mind.   And when FB finally started trading, it could only be described as underwhelming.  It opened a few dollars higher, but quickly retreated to the offer price where it found a floor, no doubt a result of many traders putting in limit orders at $38 and the stock will continue finding good support there until all those limit orders are filled.  But given early trade, it seems like the FB IPO generated far more smoke than fire as the frenzy was more more manufactured by the press than a real phenomena among traders.

LNKD daily @ 12:45 EDT

The big loser with FB’s tepid IPO seems to be LNKD as it sliced through the 50dma on the less than enthusiastic reception of FB shares.  No doubt there was a FB premium built into LNKD since they close cousins and this let the air out of LNKD shares.  Just another example of a strong leader stumbling and falling victim to the recent weakness.  But there is still a lot of trading left in the day as IPOs are often volatile out of the gate.  In fact, as I write this, LNKD has bounced off the lows and FB has also moved above the offer.  Who knows, we could still see the FB rush this afternoon as many traders were afraid to buy at the open.

Back to the markets, the good news about the recent sell-off is it has created attractive levels in many leading stocks.  Of course the challenge for the savvy trader is figuring out when the storm has passed and it is safe to move his chips back in.  It is interesting to hear many professional traders mention how attractive prices are and they are wading back in on the long side.  Are these savvy traders getting ahead of everyone else, or are they simply representative of sentiment felt by a large number of traders?  If too many people think these are attractive levels and are buying right now, this will lead to short lived support because once they are done buying, the market will resume its previous trend.

The structural problem facing the markets right now is typically it takes enthusiastic buyers to move a stocks price higher and they fight each other as they bid up the price.  And no doubt enthusiastic sellers will also drop a stock.  But that is not the only thing that causes a stock to fall.  Lack of buyers can also pressure prices as they fall under their own weight due to a dearth of buyers.  Why this is important is even if we have exhausted enthusiastic sellers, we could still continue to decline if buyers remain gun-shy over headline risk.  So while a rising stock will typically reverse when it runs out of buyers, the opposite is not true with sell-offs as the market can continue declining even after it runs out of sellers.  And compounding this is many experienced traders have long ago learned defense is an important part of successful trading and declining prices can trigger automatic stop-losses, which in turn pushes the market down and triggers yet another wave of stop-losses.  This continues until either we run through all the stop-losses or the prices become so tempting to value investors that they rush in and prop up the market.

Back to FB related trades, could the pressure we’ve seen in AAPL and other leaders be liquidations by big money in order to free $16+ billion of capital necessary make room for the FB IPO?  It is an interesting thesis and we’ll see how these stocks trade going forward.  Of course there are several components to a stock’s price: 1) Fundamentals  2) Technicals  3) Supply and Demand and  4) Sentiment.  AAPL’s fundamental story is still intact, so that is not the source of the correction.  Selling to make room for FB falls under supply and demand, so once that phenomena stops today, it will remove that downward pressure.  But the wildcard is if AAPL’s slide dented the euphoric sentiment and technicals that lifted it in the first quarter.  These two factors could turn into a headwind going forward.  Time will tell.

Stay safe.

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About the Author

Jani Ziedins (pronounced Ya-nee) is a full-time investor and writer who has successfully traded stocks and options for more than a decade. He earned a B.S. in Mechanical Engineering from the Colorado School of Mines and an MBA and M.S. Marketing from the University of Colorado Denver. His prior professional experience includes manufacturing engineering at Fortune 500 companies, structural engineering, small business consultant, collegiate instructor, and managing investment real estate. He is now fortunate enough to trade full-time from home, affording him the luxury of spending extra time with his wife and two young children.